The Biden administration has been working to limit the use of Chinese battery components in US electric vehicles, impacting companies like Tesla. As a result, Tesla recently announced that two of its models will no longer qualify for the full $7,500 federal tax credit as of January 1, 2024. The company’s website currently displays a banner warning customers that tax credit reductions are likely for certain vehicles in 2024. The message urges customers to take delivery of their vehicle by December 31 in order to qualify for the full tax credit. Furthermore, a link in the banner directs customers to a message that specifies which two models are likely to be affected.
Under the Inflation Reduction Act (IRA) rules, vehicles that use battery components that are at least 50 percent made or assembled in the US qualify for the first $3,750 of the tax credit. The vehicle can only receive the remaining $3,750 of the credit if the manufacturer sources at least 40 percent of their critical minerals from the US or its free trade partners, excluding China. The latest proposal on IRA credit rules issued on December 1 seeks to further tighten the requirements by targeting Foreign Entities of Concern (FEOCs), such as China, Russia, North Korea, and Iran.
The recent change in tax credit eligibility may prompt Tesla to source batteries from other countries, which could result in increased costs for the company. Despite being able to switch previously from half the tax credit to the full credit due to changes in suppliers or materials to meet the guidelines, the latest reversal only offers half the credit. This may eventually result in zero credit next year unless Tesla is willing to explore alternative sources for their batteries.
It is evident that the proposed changes in the clean vehicle tax credit requirements pose significant challenges for Tesla and other electric vehicle manufacturers. These changes are aimed at reducing reliance on battery components and critical minerals sourced from Foreign Entities of Concern, which could impact the affordability and accessibility of electric vehicles for consumers. Tesla and other companies in the electric vehicle industry will need to navigate these evolving regulations to maintain their competitive edge in the market.